Allcargo Logistics Ltd

NSE:ALLCARGO

Earnings Call Analysis

Company Navigates Challenging Economic Climate

Amidst a sluggish global trade environment, the company reported a decline in Q2 FY 2024 revenue to INR 3,307 crores from INR 5,055 crores in the previous year's quarter. Consolidated EBITDA also fell quarter-over-quarter from INR 139 crores to INR 118 crores, with profit after tax sharply dropping to INR 16 crores as compared to INR 195 crores year-on-year. Despite acquisitions and bonus shares issued to enhance liquidity and shareholder participation, volume declines were seen in the less-than-container-load (LCL) segment by 3% year-on-year, while full-container-load (FCL) volumes remained flat. The company's Express business, Gati, showed strength, achieving an 18% growth in volumes. Allcargo Supply Chain, now wholly-owned, delivered robust performance particularly with a new mega chemical warehousing facility. The management remains optimistic, expecting a stronger near-term pipeline and strategic focus to drive future growth.

A Challenging Quarter with Declining Revenue

The company faced headwinds this quarter, with a notable revenue decline from INR 5,055 crores in Q2 FY '23 to INR 3,307 crores in Q2 FY '24, reflecting a much stronger base year and a shifting macroeconomic environment.

Profit Margins Under Pressure

Profitability experienced downward pressure, with Profit After Tax (PAT) reducing significantly to INR 16 crores from INR 195 crores in the same quarter of the previous year. The company's EBITDA also saw a decrease to INR 118 crores from INR 139 crores in the immediate past quarter, reflecting muted profitability and higher depreciation. Despite these challenges, a healthy balance sheet is maintained, highlighted by a net debt of INR 120 crores as of September 2023.

Segment-Wise Performance Varied

The International Supply Chain (ISC), the largest business segment, reported subdued demand and elevated competition, leading to a year-on-year LCL volume decrease and flat FCL volumes. The ISC's EBITDA fell to INR 65 crores from INR 111 crores previously. However, the Express business under Gati delivered robust growth with an 18% increase in volumes and a revenue jump to INR 385 crores. The Contract Logistics business also saw positive EBITDA growth, promising sustained momentum in the medium to long term amid rising warehousing demand.

Strategic Focus Amidst Macroeconomic Outlook

The company is working on improving EBIT per TEU by maintaining trade lane dynamics and managing costs strategically. Current initiatives include expanding into strategic, yet initially loss-making trade lanes and pursuing automation and restructuring to cut costs. While the cost optimization exercises are expected to conclude by the end of December, with full effects likely by February or March, the broader recovery and future profitability are dependent on the macroeconomic environment, which remains weak.

Earnings Call Transcript 2024-Q2

[Operator]

Ladies and gentlemen, good day, and welcome to the Allcargo Logistics Limited Q2 and H1 FY '24 Earnings Conference Call hosted by Dolat Capital.

This conference call may contain forward-looking statements about the company, which are based on the beliefs, opinions and expectations of the company as on the date of this call. These statements are not the guarantees of future performance and involve risks and uncertainties that are difficult to predict.

[Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Abhishek Jain from Dolat Capital. Thank you, and over to you, sir.

[Abhishek Jain, analyst]

Thank you, Dorian. Good afternoon to everyone. On behalf of Dolat Capital, I welcome you all to Q2 FY '24 Earnings Conference Call of Allcargo Logistics Limited. We thank the management for providing us the opportunity to host the call.

From the management side, we have with us Mr. Ravi Jakhar, Group Chief Strategy Officer; and Mr. Deepal Shah, Group CFO. Now I hand over the call to Mr. Ravi for opening remarks, followed by the question-and-answer session. Thank you, and over to you, sir.

[Ravi Jakhar, executive]

Thank you, Abhishek. Good evening, and a very warm welcome to everyone on our Q2 and H1 FY 2024 Earnings Conference Call. Let me take this opportunity to wish you all a very happy new year, the new [ samba 2018 ] may bring prosperity and happiness to all.

We have uploaded our results and earnings presentation on the stock exchanges as well as the company's website, and I hope everyone had an opportunity to go through the same, which includes the results as well as the investor presentation.

As mentioned, today, I'm joined by my colleague, Deepal Shah, and we would endeavor to provide you brief highlights from the quarter and the half year gone by and also respond to your questions with utmost sincerity.

To begin with, let me speak a bit about the macroeconomic environment. The global economy is expected to slowly recover from the pandemic. However, the global trade flows recovery has been relatively even weaker than what we had expected and this is in line with the economists expectations.

We have seen that several factors continue to raise concerns such as the muted Chinese state outlook, geopolitical tensions, posing an upside risk to fuel prices and weaker-than-expected pickup in pre-Christmas stocking, which is usually seen leading to increased shipments from July end, that uptick has been relatively sluggish as well.

China, a country that plays a major role in global trade, is also grappling with its internal real estate crisis and diminished external demand. Chinese exports for the month of October shrank 6.4% year-on-year. As per Reuters' report, we also understand that China's official Purchasing Managers Index last week showed both new export and import orders shrank for an eighth consecutive month in October, which basically continues from the Chinese New Year gone by.

This suggests that manufacturers are struggling to find buyers overseas and ordering fewer components domestically as well. Among the other major economies that impact global trade such as the U.S. and U.K., too are facing sluggish demand growth. Although on a positive side, the risk of banking stability has softened, but the trade outlook remains cloudy.

The International Monetary Fund has projected that global GDP growth will remain steady at around 3% in 2023. However, for the 2024, they have revised the forecast slightly downwards to 2.9% from the previous estimate of 3%.

Our outlook for the global trade recovery mirrors the growth concerns in China and the Western world. We continue to maintain our view that any meaningful recovery is likely to happen post Chinese New Year, which is Feb 2024.

Coming to Allcargo Logistics and our business, operating under various subsidiaries, I would like to share a few business updates. First, on the corporate action side, as you would have noticed, the Board has approved the issuance of 3 bonus shares [indiscernible] this decision is aimed at improving the liquidity and allowing for a broader-based participation of shareholders in the company.

Besides, this shall also facilitate the strategic restructuring plans that we have been pursuing. The company has built significant reserves over the years and the issuance of bonus shares will use less than 15% of available reserves, which is a sign of company's health. The company also recently demerged 2 businesses, which were listed in the quarter gone by on tenth of August, and the Board considered it appropriate to issue bonus shares once the demerger proceedings are completed, and this Board meeting for the quarter ending September 2023.

The company has exhibited strong performance over the last several years and taken significant initiatives to deleverage the balance sheet, which has resulted in a very low net debt as of September 30, and my colleague, Deepal, will talk more about it.

If you look at it, this is remarkable considering the recent spree of acquisitions. We acquired the balance shares from minority shareholders in Gati Express & Supply Chain as well as in Allcargo supply chain. We also recently increased our shareholding in Nordicon to 90%, besides the acquisition in Germany earlier during the year 2023. All of this has been enabled, to a large extent, by strong internal accruals from the businesses.

On the international supply chain side of the business, while the current macroeconomic environment has unexpectedly led to significantly lower performance in recent quarters. The company is hopeful that the prudent approach by the company over the years that led to a very strong balance sheet will provide a strong base for future growth.

The business, which sits under the company's flagship subsidiary ECU Worldwide is driven by a completely asset-light approach with digital strategy being the fundamental pivot for future growth, and I'm glad that all our digital initiatives are tracking well on schedule.

Further, ECU Worldwide continues to strengthen its global market leadership in the LCL consolidation business on account of significant efforts and investments and acquisitions acqui-hiring and transformation of the business on an ongoing basis, despite all the challenges and headwinds.

I would like to highlight here that most leading international forwarders have reported a volume decline ranging from minus 4% to slightly lower in the quarter 2 FY '24. This was accompanied by a decline in yields ranging from minus 25% to minus 38%. In comparison, our LCL volumes are down 3% year-on-year and FCL volumes have remained flat. In terms of the LCL volumes, we estimate that our key competitors operating globally are significantly lower on a year-on-year comparison. We have highlighted that a recovery might not be visible immediately, but we'll continue to focus on our market share efforts along with cost efficiencies.

In line with our improved disclosures, we shall continue to keep our various stakeholders updated on the near-term market developments through our monthly operational release. As we have stated in the past, the International Supply Chain business operates on a January to December calendar year budgeting, therefore, we are also in the stage of budgeting for the next year. And in the due course of next couple of months, we would also have a better forecast and visibility on our next year's budget and the 3 years business plan, based on which we also intend to share our revised guidance in the coming months.

Moving on to our Express business. The company is making remarkable strides, consistently delivering top-notch service levels while continuously striving to enhance operational efficiency. It was somewhere around the early 2023 that our operational indicators started to fall in line on the back of transformational initiatives and also the suitable infrastructure coming up.

The company has achieved strong performance in Gati Express & Supply Chain in terms of volumes, driven by increased demand, driven by infrastructure amplification, sales acceleration initiatives and also on the back of good domestic festive season demand.

You might be aware that we have recently launched the Bengaluru Super Hub and remain on track on the infra rollout front, a majority of which is already accomplished. Additionally, the company remains steadfast in its commitment to improving EBITDA on the back of operating leverage through increased revenue and volumes, and that should improve the overall profitability as well.

So that outlook on Gati Express & Supply Chain, which is the operating entity continues to remain strong and is backed by the demonstration of strong volume and growth in the quarter to FY '24. A detailed highlights and -- have already been provided in the Gati call. Gati already being a separately listed entity.

Coming to the Contract Logistics business, which is housed under Allcargo supply chain and is now a 100% subsidiary of Allcargo, I'm glad to note that, that business continues to deliver robust performance. Recently, the company has set up a state-of-the-art grade A chemical warehousing facility at its mega multiuser chemical warehousing complex at Uran in Navi Mumbai.

This has been set up for one of the largest chemical companies in the world and is a hallmark of quality excellence in the country. The business, besides the niche chemical segment in which it continues its market dominance, has now started to grow rapidly in the e-commerce space as well as other opportunities in warehousing ranging from auto components to furniture and other CBIT domain opportunities.

In facilities where we store chemicals, it requires strict adherence to highest safety standards and statutory compliances of international standards, which demonstrates the capabilities underlying in the Allcargo supply chain business. We continue to manage a little more than 5 million square feet of warehouse, and we have seen a good pickup in volumes, revenue and profitability in this business.

Compared to last year, there was also a portion of business, which was a low-margin third-party logistics kind of an opportunity, which was pursued for a period of time for specific reasons, which is not continuing. And that is why the expansion in profit margins is seem to be healthier as compared to the revenue margins.

A part of it is also contributed by capitalization of these expenses. In terms of the future prospects, we see strong demand. We have a robust pipeline in this business. And we are already invested in people capabilities for a solution design perspective. We are participating in greater set of opportunities, and we have a very healthy pipeline, which provides good visibility for continued growth in the coming quarters.

That was a brief snapshot of all the 3 businesses operating under Allcargo Logistics. I will now hand over the call to my colleague Deepal for his comments on the reported financials, and then we can get back to further discussions in the form of Q&A. Thank you. Over to you, Deepal.

[Deepal Shah, executive]

Thank you, Ravi. Good afternoon, everyone, and a very happy Diwali and a Happy New Year to you all and your loved ones. I will now discuss the performance for quarter 2 FY '24. Our revenue has declined on a yearly basis, owing to a much stronger base and a different macroeconomic environment.

The consolidated revenue for Q2 FY '24 stood at INR 3,307 crores as compared to INR 5,055 crores in Q2 of FY '23 and INR 3,271 crores in Q1 FY '23 (sic) [ Q1 FY '24 ]. The consolidated EBITDA for Q2 FY '24 stood at INR 118 crores as compared to INR 139 crores in Q1 FY '24.

The muted profitability along with the slightly higher depreciation has led to the PAT, profit after tax, for the quarter ended September '23, declining to INR 16 crores as compared to INR 195 crores for the same quarter last year. Point to note is that our balance sheet remains very healthy with a net debt of INR 120 crores as of September 2023.

Now moving on to the business segment-wise performance. I will start by discussing the performance of the International Supply Chain, which is the largest business. The demand scenario continues to remain weak, like Ravi said, and competition remains high. We continue to focus on outperforming industry amidst muted demand. LCL volumes for the Q2 FY '24 stood at 2.3 million cubic meters as compared to 2.4 million cubic meters for Q2 FY '23.

On the FCL front, the volume of Q2 FY '24 remains flat year-on-year, and stood at 1,528 million TEUs. The ISC business reported a revenue of INR 2,795 crores as compared to INR 4,614 crores for FY '23 and INR 2,823 crores for Q1 FY '24. The EBITDA for the same period stood at INR 65 crores as compared to INR 111 crores for Q1 FY '24.

Moving on from the ISC business to the Express business under Gati. The segment continues to deliver strong performance with higher emphasis on improving operational efficiencies. The volumes for Q2 FY '24 stood at 333 kt as compared to 283 kt in Q2 FY '23, a remarkable 18% year-on-year growth. Revenue stood at INR 385 crores for Q2 FY '24 as compared to INR 370 crores for the previous quarter. EBITDA stood at INR 15 crores for Q2 FY '24 as compared to INR 21 crores in Q2 FY '23. An important milestone for the Express business was a successful launch of its Bangalore hub.

Moving on to the Contract Logistics business. With this under the Allcargo Supply Chain Private Limited. Contract Logistics revenue Q2 FY '24 stood at INR 76 crores as compared to INR 83 crores for Q2 FY '23. EBITDA stood at -- for the quarter September '23, stood at INR 36 crores as compared to INR 29 crores for the same quarter last year.

We're confident that this positive momentum will persist in the medium to long term given the rising demand for warehousing across various segments. We have been consistently providing other key comparative financial indicators in our investor presentations, one can refer to that for more details.

With this, I would like to open the floor for questions-and-answers. Thank you.

[Operator]

[Operator Instructions] The first question is from the line of Radha from B&K Securities.

[Radha Agarwalla, analyst]

Sir, firstly, I would like to state that in the opening remarks, we lost you in between. And there was no intervention from the operator as well, so just request you to add those sentences in the transcript, if possible.

Sir, my first question was that we had taken many initiatives like digitization, direct sales and other many cost reduction measures as well previously. So that whenever there is a fall in realizations, our EBIT per TEU is still maintained at a certain level. So this quarter, we could not see those benefits reflecting in the numbers. So could you give us some kind of analysis as to why and how do you expect to see the EBIT per TEU levels in the coming quarters considering that we are expecting -- considering the weak macroeconomic outlook?

[Ravi Jakhar, executive]

Right, right. I'll respond to that. Meanwhile, just to reconfirm, Deepal, were you able to hear me while I was speaking in the opening remarks?

[Deepal Shah, executive]

Yes, Ravi, I could hear you, but then -- opening remarks was fine, but somewhere in the middle I also got dropped out. So...

[Ravi Jakhar, executive]

Yes. Anyways, I would request yes, I would request the team to make sure that the transcript is duly recording everything that was spoken so that if anything is missed out by any participant that can be referred to later.

So coming to the -- your question on the EBIT per TEU, I would break that down into 2 components. It comes down from GP per TEU and then down to EBIT per TEU. First part, which is GP per TEU is driven by a combination of how we maintain our trade lane dynamics and how the operating market environment is. Now like I mentioned, the operating market environment has been muted, which impacts the gross profit. At the same time, on the trade lane side, we did take initiative to expand into some new trade lanes in strategic locations for examples some of the Latin American countries into European markets in Asia into Latin America and a few other strategic trade lanes, which as you build them out, tend to be loss-making. And at the same time, they are quite strategic from a long-term growth perspective. So some of those initiatives, we have continued to pursue.

We did not choose to drop them. So to give you a scale of sense, if I was to talk about all the 2,500 trade lanes that we operate and we carve out all the loss-making trade lanes at the gross profit level, that number for the quarter would be close to about $1 million. Some of the nonstrategic ones might contribute to about 25%, which we could temporarily bring down, and that should create some positive impact, not significant, but majority of that cost, we would continue to take as a hit in terms of developing the new strategic trade lanes. The macroeconomic environment as it improves typically tends to help us with better utilization, and as you could see from our operational updates in the investor presentation as well as the monthly updates, we have continued to see dropped utilization, dropped ratio of 40-feet containers, which are all operational parameters, which should improve on the back of improved demand.

And as the markets have corrected, one thing which you have been able to do is we have fallen relatively less as compared to the competition. And that means that as the recovery kicks in, we should be the fastest to recover as well. Now there is something which is a combination of a bit of strategy on the trade lane dynamics, but largely driven by the operating environment. However, where we potentially or should have done better is on the line items between gross profit and SG&A. We -- and during the first half of the year, largely through the first quarter, we were anticipating that the trade environment should improve.

And there was a little bit of a minor pickup in the month of March post-Chinese New Year and that kind of created a belief that the trade could be normalized, which, however, did not happen. And we only started acting on the cost side below the gross profit from August onwards. And that endeavor has continued now through the last few months, and we would conclude most of the cost initiatives by end of December.

Now some of these require strategically structuring in the organization, some of them are about eliminating some positions by way of automation, some requires relocation. And typically, most of these activities have a lead time of 3 to 6 months. And during such times, there are also severance costs, switch costs, et cetera, associated. So as we conclude these initiatives until the end of December, there could be a continued impact until Feb or March. But beyond that, we should see an improved state on the cost side, which means that the SG&A cost as a percentage of revenue or gross profit should come down.

So that's something which we expect should be visible from the month of March-April onwards as this point of time would have some bit of severance costs as well. However, what you'll be in a position to do is possibly for the quarter of December when all these initiatives would have been completed, we could potentially provide a ballpark indication of the quantum of one-off severance impact, which would not continue beyond the Jan to March quarter, that would give an idea about the impact on the SG&A cost improvements.

In hindsight, the organization could have been more proactive from the early part of the year as compared to starting some of these cost initiatives in August, which could have advanced a bit of reduction -- which could have basically helped us maintain healthier EBIT per TEU. However, now that we have taken some of the cost initiatives, we believe that should contribute to some extent. And as the trade volumes rebound as the utilization starts building up, we believe that the EBIT per TEU should improve.

So I would say putting these in perspective in terms of timelines, we should see EBIT per TEU improve from the April onwards and we could still call out some of the exceptional costs in the Jan to March quarter. October to December is likely to remain similar. I hope that provides a decent perspective on how it is playing out and what we are trying to do.

[Radha Agarwalla, analyst]

Yes, sir. Sir, secondly, you mentioned that till the Chinese New Year, we are expecting that demand to remain muted. So given that this quarter -- last 2 quarters, we have seen significant impact due to the lower demand, so -- and we have seen a drop in our profitability level. So going forward, especially in 3Q and 4Q, 4Q partially because of the Chinese New Year, so do we expect to remain profitable? Or do you see any kind of scenario because of the SG&A cost and then lower demand to go into losses?

[Ravi Jakhar, executive]

No. So I don't see us going into losses or any of those scenarios. Also to further carve out, some of the performance is also muted on account of 2 big countries, which have actually been in the losses, which is U.S. and Germany. And in these 2 countries, we have already seen some degree of reversal on the trends because some of the outsourcing and cost reduction initiatives have already started around August, September, like I mentioned.

So in keeping that into mind, unless the economic environment was to deteriorate further, we should only see an improvement from this quarter onwards. If there was to be continued deterioration in the economic environment, then we could see it being flat. We do not foresee a scenario of the performance going further down from here. But it may not see a significant uplift over the next 2 quarters.

And like I said, the impact of cost reduction initiatives as well as the improvements in the macroeconomic environment should potentially start from Chinese New year around mid-Feb, end Feb, and that's where we should possibly start seeing some degree of an upward movement. That's our anticipation right now based on what we see on the ground.

[Radha Agarwalla, analyst]

Sir, for the third quarter, I mean, given that now we are past 45 days for the third quarter, so are you seeing any kind of an uptick in demand as compared to the second quarter? And if so, even if we can maintain a similar volume, can we assume that this is the lowest for our EBIT per TEU?

[Ravi Jakhar, executive]

So I would say that we are not seeing any demand uptick. The environment continues to remain flat in terms of the overall demand outlook in the market. In terms of EBIT per TEU our best estimate is that it should remain flat and should grow as the -- on account of 2 initiatives, one, cost reduction below GP; and second is the turnaround in macroeconomic situation; and the third factor is reversal in performance of specific countries in our business portfolio.

So a combination of these 3 things should help. On the first one on the cost reduction, I have a more definitive visibility because those are completely controlled internal initiatives and should be completed by December and with some severance one-off costs still being there in the Jan to March quarter, from April onwards should be a clean improvement. On the macroeconomic environment, our estimate is beyond Feb New Year, things should improve. That is something which is based on an assessment of ground reality and what we also hear from global experts and economic experts.

On the loss-making offices turning around, we have seen positive momentum over the last couple of months that trend should continue and should also help improve the bottom line. So all in all, if you read into these 3 trends, the performance should remain range bound for the next quarter and then perhaps start to improve primarily from the April quarter onwards is how we look at the situation right now. And of course, these are based on various estimates, like I mentioned.

[Radha Agarwalla, analyst]

Okay, sir. And sir, could you give us any insights on the realization front for this International Supply Chain business. So this quarter, we are at 114,000 per TEU and we're given to understand that given that freight rates have already come down to COVID levels -- pre-COVID levels, so any -- because of lower demand scenario, do you see the realizations going down further? If there is any pricing pressure or anything, could you give us any insight on the realization front?

[Ravi Jakhar, executive]

Yes. So we were anticipating that there will be an impact on the ocean freights on account of trade disruptions getting normalized. This is I'm referring to 12 months ago. However, as the economic slowdown also kicked in on the back of the trade disruptions going up, the freight rates have dropped significantly, now going back to not just pre-COVID levels, in some trade lanes even below the pre-COVID levels. .

However, as we maintained that impacts the FCL business largely. On the LCL business, the challenge is that when freight rates become much lower, some of the volume from customers can switch to FCL, which leads to further pressure on the volume side. LCL profitability is still largely driven by the utilization in the box and how much of 40-feet boxes can we carry and that's something which has remained almost close to 10% below the last year's levels. And that is where we believe the improvement is likely on the back of volumes when the trade recovers.

And in terms of realization, I would recommend that when looking at the LCL business, we do share data on the LCL and CBM and that can possibly help you get a better perspective as we charge revenue on a per cubic meter basis.

[Radha Agarwalla, analyst]

Sir, if there is a scenario for realization...

[Operator]

Sorry to interrupt, mam, we request you to please rejoin the queue for follow-up questions. The next question is from the line of Jiya Shah from Wealth Securities.

[Jiya Shah, analyst]

So my question is regarding the plan that you've mentioned for a more simplified structure involving Allcargo, Gati and Allcargo Supply Chain. Could you provide any update on the progress or offer a potential time line for the same?

[Ravi Jakhar, executive]

So this is something which has been under consideration. And like we have provided an update in the past, the Board had advised us to engage with advisers on potential structures and various advantages or disadvantages the same. And it is still a matter under discussion, and we cannot provide any specific updates since the discussions are still underway, and there's no concrete decision at this point in time. However, like we have mentioned in the past, any outcome would be towards simplification of the structure and we have continued to build synergies between the Express and the Contract Logistics business, which now also are under the common leadership.

So to that extent, strategy is clear in terms of the approach and structure, things are still under discussion. And like I said earlier during my comments, the recent initiative of providing bonus share should also potentially aid the restructuring plan. Beyond that, it is not possible to share any further details at this point in time. But as we make any progress and make concrete decisions approved by the Board, we'll definitely come back to all shareholders and stakeholders.

[Operator]

The next question is from the line of Darshil Jhaveri from Crown Capital.

[Darshil Jhaveri, analyst]

Sir, am I audible?

[Ravi Jakhar, executive]

Yes, you are.

[Darshil Jhaveri, analyst]

Yes. Sir, first of all, happy Diwali, sir. Sir, just wanted to get a sense, I think you partly answered my question. So if I can get the corrections. Our H2 will also be range bound such as H1? It will be on the similar trajectory as H1 and we can see volume pickup in FY '25, right? Is that a fair way to look at it, sir?

[Ravi Jakhar, executive]

So that is largely correct. Our anticipation is that typically, the Chinese New Year, which falls in the month of February is typically a low season after which the pickup starts. So December usually also has been -- the demand forecast, you can typically see 2 months out because when you're your booking cargo and considering the ocean voyage. So we are already mid of November. So it appears that the next few months, 2, 3 months would remain muted on the demand side. And therefore, post-Chinese New Year, which is end of Feb onwards, we should see pickup that's our anticipation. And that, of course, yes, means that the Q4 would also be largely a similar trend. And from April onwards, we should see a recovery. That's what is our estimate at this point in time. You are correct.

[Darshil Jhaveri, analyst]

Okay. Just also wanted to -- I think I got cut in the middle in the call. So why has there been a sudden spike in a depreciation, sir?

[Ravi Jakhar, executive]

So I would request my colleague, Deepal, to take that question. Deepal, would you like to that up, please?

[Operator]

Mr. Deepal Shah, your line has been unmuted. You may proceed. Can you hear us?

[Deepal Shah, executive]

Yes. Am I audible now?

[Operator]

Yes. You are audible, sir.

[Deepal Shah, executive]

Sure. So if you remember in the last quarter, we had acquired the balance 38% in the Contract Logistics business, which made us into 100 -- which made the ACPL subsidiary into 100% subsidiary allowing us to consolidate line by line. Now that acquisition happened end of May. Last quarter, it was only 1 month of depreciation from that business, which was added. This quarter, we have also 3 months depreciation added from that business. Contract Logistics business operates through lease warehouses across India and because of the lease accounting, the AS 116, the higher amount of depreciation from the Contract Logistics business has got stuck into the current quarter, that's the reason the depreciation has bumped up.

[Darshil Jhaveri, analyst]

So, sir, our Q2 numbers of -- sir, leases would impact our interest cost as well. So our interest and depreciation are not one-off, they'll continue at these rates, correct, sir?

[Deepal Shah, executive]

So Q2 will continue -- the Q2 will be -- post acquisition, Q2 numbers will be...

[Darshil Jhaveri, analyst]

Just Q2?

[Deepal Shah, executive]

Yes, that's correct.

[Darshil Jhaveri, analyst]

Yes. And sir, just 1 last query, sir. So with this our margins have been severely impacted on a [ prior ] basis, so where do -- do we see a possibility that it could further deteriorate? Because then -- because at around INR 17 crores PBT that would have a higher impact on us. You would have very less margin in terms of our EBITDA also, right? So is there a possibility that this could further deteriorate currently? And how confident are we that FY '25 would start on a better note? Or is it just that we feel that bottoming out has yet not happen? That's the only question that I have. Like if I could -- if I would makes sense.

[Ravi Jakhar, executive]

Yes. So I just responded, this is the same question actually, but I would just summarize again, the improvement in performance would be led by our internal initiatives on cost reduction, which is the clear 100% visibility internally and that's something which is showing results and net of severance costs, et cetera, should definitely make positive contributions from April onwards. On the macroeconomic environment, we are hopeful of a recovery. We cannot say for certainty, but we definitely do not see the situation deteriorating with the inflation falling in control and with the economic indicators suggesting that the trade could see normalization in the following months, we believe that the rate should normalize.

So in terms of the performance, what we see, we believe that some of the factors on external side might remain flattish while internal initiatives could drive up the cost initiatives. And therefore, there should be a positive movement from -- which should fully reflect from April quarter onwards. That's what I was just responding to in detail. And our team would share the transcript, I would request you to refer to that for further detailed insights as well. Thank you.

[Operator]

[Operator Instructions] The next question is from the line of Hemesh Desai from Dolat Capital.

[Hemesh Desai, analyst]

Am I audible?

[Ravi Jakhar, executive]

Yes.

[Hemesh Desai, analyst]

I just have a couple of questions. The first question will be on the International Supply Chain business. How is the share of India compared to U.S. and Europe?

[Ravi Jakhar, executive]

Yes. So the share of India in terms of the top line has marginally increased on the account of Indian business holding better than the rest of the economies. In terms of profit, the share has gone up significantly on a relative basis because India continues to do better as compared to some of the Western Europe and Americas.

And like I was mentioning, a couple of large countries had also been on the loss side, which means that the share of India would have gone up. We believe this share would remain on a higher level and should possibly also normalize as other countries recover in terms of trade volumes and therefore, improved performance for us in the business as well.

[Hemesh Desai, analyst]

So would you be having an absolute number in terms of percentage, a rough idea?

[Ravi Jakhar, executive]

We don't share in that sense. However, you could look at the stand-alone performance of Allcargo. Basically, since the Express business and Contract Logistics businesses are under the subsidiary, stand-alone business is effectively the business of International Supply Chain operating in India and some of the corporate costs sitting in there. So if you look at the stand-alone numbers, you can do some analysis on that, that would be my recommendation.

[Hemesh Desai, analyst]

Okay. And so on the exports part, a lot of the dealers have already completed their inventory destocking. So how do we see volume growth going forward?

[Ravi Jakhar, executive]

So like I mentioned, it appears that from a timing point of view, we haven't seen much pickup for December and then towards end Jan -- Feb you have Chinese New Year, which typically means a relatively slower trade movement.

So we believe that the trade pickup should happen post Chinese New Year, which is towards the end of Feb early March. That's our expectation at this point in time. And that should also mean a few more additional months of the inflation cooling off in western economies and that should improve the demand outlook. And inventory destocking has already happened as it is visible from ample warehouse space available easily across Europe, Americas and even parts of Asia, which was not the case 12 months ago.

[Hemesh Desai, analyst]

Okay. And which would be your top 5 countries? And could you help us with the market share over there?

[Ravi Jakhar, executive]

So we are very strong in Western and Northern Europe. We have more than 40% market share in Nordic countries and an extremely high share in Belgium also close to 40%. And in U.K. and France also we have a high share. India, of course, we are market leaders in the International Supply Chain business. And we are also rapidly improving our market share in a lot of Asian economies such as Indonesia, Philippines, Vietnam and even the main market of China. In terms of the size of the market, clearly, India, China, U.S. and some of the bigger Western European countries would form the biggest part of our revenue and volumes in this business.

[Hemesh Desai, analyst]

Okay. And just the last question. Are there any progress of new acquisitions in Germany?

[Ravi Jakhar, executive]

No. So we continue to integrate and rationalize the costs because unlike other acquisitions, which were plug-in, this is an acquisition which is also a merger in a way with our German operations and the Fair Trade operations finding synergies, and that process continues and no further development beyond what has already been shared.

[Operator]

[Operator Instructions] The next question is from the line of Marshall -- I'm sorry, that's Nirav Savai with Abakkus.

[Nirav Savai, analyst]

Most of my questions are actually answered, just a couple of ones. You said something about nonstrategic trade lanes, so can you just help me out with the contribution in terms of volumes and how much does it contribute at EBITDA level?

[Ravi Jakhar, executive]

So like I mentioned, nonstrategic trade lanes could be roughly about negative USD 200,000 for the quarter. These are basically trade lanes which are business trade lanes but not strategically important to be continued in loss and therefore, there could be some opportunities for rationalization.

[Nirav Savai, analyst]

Okay. So they are about $200,000 in terms of loss at EBITDA level, right?

[Ravi Jakhar, executive]

So trade lanes, you typically look at the gross profit level because the manpower cost or admin cost doesn't change with trade lanes.

[Nirav Savai, analyst]

Right. Right. And this contributes what percentage of overall volume?

[Ravi Jakhar, executive]

This will be a very minuscule portion.

[Nirav Savai, analyst]

And lastly, on this 38% stake, which we acquired in our supply chain business, what was the outflow there behind that? I think the announcement has happened in the month of March, but as you said it happened actually in the month of May. So what has been the cash outflow on account of this acquisition?

[Ravi Jakhar, executive]

Sure. Deepal, would you like to respond to this? Operator, can you check if the Deepal's line is unmuted?

[Operator]

Deepal, sir, you're not audible if you are speaking.

[Deepal Shah, executive]

Yes. Am I audible now?

[Operator]

Yes. Yes, you are.

[Deepal Shah, executive]

Sorry. Yes, it was around -- at the gross level, it was -- the total net outflow was around INR 120 crores because we gave away the [indiscernible] business. So yes, that was around the net outflow.

[Nirav Savai, analyst]

And all 3 put together, KWE with this supply chain and...

[Deepal Shah, executive]

It would be around INR 405 crores. So INR 525 crores is what between KWE and Contract Logistics businesses the outflow in the Q1 and Q -- YTD Q2, I mean.

[Nirav Savai, analyst]

Okay. And also we'd increased our stake in Nordic to 90%? So was it about INR 180 crores to INR 200 crores there?

[Ravi Jakhar, executive]

Yes. So just to add to that, like Deepal mentioned, about INR 525 crores, INR 530 crores in the domestic acquisitions and the international acquisitions of Fair Trade in January and Nordicon later in the year, put together would be approximately INR 250 crores. So all put together, we're talking about roughly about INR 750 crores, INR 800 crores of acquisition investment for the...

[Nirav Savai, analyst]

This all happened in the first half of '24 only?

[Deepal Shah, executive]

Correct.

[Operator]

The next question is from the line of [ Marcell ], an Individual Investor.

[Unknown Attendee]

Yes, my question is regarding the Express distribution. I hope this is a Gati business in India mainly?

[Ravi Jakhar, executive]

Yes, the Express business is the business operating under Gati Express & Supply Chain, which is a subsidiary of the listed entity Gati Limited.

[Unknown Attendee]

So like it is very disappointing to mention that like in India, all courier business are flourishing. I know some of the business who appeared to be my distant relative, they are bringing crores of rupees, whereas their business size is much smaller in terms of the capital investment and so on so. Here like on this business, we are losing significantly, number one.

Number two, in the September quarter, we have added about INR 140 crores additional segment assets in this segment. And [ third point ] increase the liability of INR 30 crores. So net of liabilities, we have added another INR 110 crores. So we have invested almost INR 1,500 crore. And our result is like almost flat, there is no like increase in the revenue, although there is a -- like every 6 months -- [indiscernible] by the company, plus on the top, like if you see the segment results, we have lost last year INR 24 crores and this year, we are going to lose about, maybe INR 18 crores you already lost, maybe you'll lose INR 40 crore. So what is your game plan to reduce the cost of this segment, number one?

And what is the game plan to increase more, you can say, for example, for corporate customer, what is the target given to the -- like what target is given to your sales personnel to have more -- to enroll more the corporate customer and how to turn around this division? Otherwise, it is bleeding from here.

[Ravi Jakhar, executive]

Yes. So your observations on the impact on the financials in terms of the capital investments invested in Gati and the underlying subsidiary and the current business impact in terms of the bad contribution are valid. However, I would like to bring to your attention that the strategy at Gati has always been to turn around an enterprise, which was loss-making, losing market share with run down infrastructure with a magnitude of problems.

A lot has been achieved in the last over 2 years of transformational initiatives at Gati. All the hubs have been redeveloped. In the quarter gone by, we saw a significant increase in volume, which also indicates market share expansion for the first time in perhaps last close to 8 years of Gati losing its market share.

The management team has also been able to drive significant digital initiatives. The volumes have come back in, the infrastructure is now in place. So we are quite optimistic that the company should start delivering profits as well in the quarters to follow. And it is our belief that has led to the second tranche of investment as well, which we made earlier this year in the underlying subsidiary.

Considering that Gati is also a listed company and to be fair to all shareholders, we generally refrain from getting too deep on the Gati discussions. And I would also encourage you to look at the commentary shared on extreme details in the business around strategies for key enterprise accounts, expansion of the MSME segment as well in the Gati Limited earnings call as well.

But in terms of the performance of the company, like I said, the operational parameters started to improve earlier this year. The volumes have started to shoot in the last few months, showing a great quarter ending September in terms of the volumes. And we believe that the performance should improve in the coming quarters in terms of the profit as well as the operating leverage plays out. So...

[Unknown Attendee]

Yes, Ravi babu, thank you for the generic response. I do not need a generic response. The point I'm drawing is that even if I consider the about INR 15 crore increase in the revenue during September quarter, and it is like -- now it's INR 441 crores, so even if I extrapolate by 4, it makes only like INR 1,764 crores -- yes, INR 1,768 crores, which is even less than the last year.

Last year, we achieved INR 1,723 crores or like this marginal increase, like INR 1,768 crores. So by this way, I think we are only passing time, let me be a bit harsh here because even -- I'm surprised that even on a quarterly turnover of INR 441 crores, we are not EBITDA positive.

I'm not even talking about net positive. There are courier companies, which are not even doing INR 200 crores per quarter, and they are making good profit, healthy profit they are making there because -- so it's very clear that your fixed cost base is very high here.

Because if you are just going to wait for this turnover increase and revenue share and volume, this is very, very like it is not like -- if we are just trying to just like fix some corner and bottom like -- by this way, is not going to help out. The cost structure in this business is way high because like I'm surprising I'm not even talking net positive, I'm talking about the EBITDA positive.

So at the same time, if you see, for example, our profitability at the consolidated level is significant down, but we have increased the salary by INR 30 crore like during this quarter our salary budget has grown by INR 30 crores. There are many companies that listed our Indian -- the listed companies in India, wherein the profit was slightly lower than last year, the senior management has not taken an increase.

Here, we are increasing salaries, which becomes sort of a permanent cost, so there is a humble suggestion, recommendation and feedback that something drastically restructuring must be done here in terms of cost overall, in terms of reducing fixed costs, otherwise see, INR 1,700 crores turnover and we are EBITDA negative, something is drastically wrong.

Otherwise in this kind of like turnover, at least we must make INR 200 crore of EBITDA positive, the way other companies -- the way the courier company you can name many companies, you can say example, like Flyking, you can say for your Professional Couriers, you can say like DTDC, they're all making good profit. So please, we need some sort of surgical operation needed here, kindly advise, kindly update.

[Ravi Jakhar, executive]

Yes, your comments are really noted and we'll pass on to the management team of Gati as well. And I would just also recommend that you look at the performance, not at the consol level in Gati because there are other businesses such as fuel stations sitting in the parent, let's say, entity and a few other businesses historically, which have been closed down, which are loss-making. So I would recommend that from the extra business perspective, you could look at the underlying operating entity Gati Express & Supply Chain performance. And I would also recommend that you could potentially get more insights and direct responses from the Gati management during our earnings call for Gati Limited. Having said that, we'll pass on your comments and observations to the management team.

[Operator]

We have the next question from the line of Abhishek Jain from Dolat Capital.

[Abhishek Jain, analyst]

Sir, as you mentioned that there is a slowdown in the business in Germany and China. So what was the contribution in supply chain business 1 year back of these countries? And how much the current contribution?

[Ravi Jakhar, executive]

Yes. So I responded on that earlier that the contribution of India has gone up because India has been relatively better performing market. And there are a few other countries which have seen growth from last year, but they are on the smaller size countries such as Brazil and the Latin Americas. We have also seen in terms of the decline on profitability, we have seen some of the Western European countries, U.S. and China as the most impacted countries. Exact percentage shares on a country basis, we don't share, but we'll see if we can provide some indications in the upcoming investor presentation, so it can be accessed by everyone. We'll take that into consideration.

[Abhishek Jain, analyst]

Okay, sir. And my next question is from the contract logistics business. So sale of the e-commerce is increasing now. So despite that, the margin is very much strong in the second quarter, will this be sustainable?

[Ravi Jakhar, executive]

So the margin in this business should be sustainable as we are already investing in white spaces, which are already at an optimal level. So it's not that we have a low white space in terms of the staff cost also we have well provided for the growth initiatives. So this is 1 business which like I've always maintained has continued to remain strong for us over the last 6, 7 years and continues to both grow well and hold reasonable profit numbers as well. And we see the trend continue in the coming quarters as well.

[Abhishek Jain, analyst]

And my last question on the CapEx side, how much the CapEx you have incurred in the first half? And what is your plan for the full year FY '24?

[Ravi Jakhar, executive]

Yes. So our strategy is to be asset light, and therefore, we don't see any significant CapEx besides some of the technology initiatives, but I would also request my colleague Deepal to add on the CapEx during the last 6 months and the coming 6 months. Deepal, over to you.

[Operator]

Deepal sir, you need to unmute your line. You're not audible.

[Deepal Shah, executive]

Yes, we -- you're right, we have an asset-light strategy. So we do not have any significant CapEx during the first half of the year. The only additions, if any, have come from Contract Logistics merger. So there aren't -- it's just for maintenance CapEx and routine IT CapEx in terms of maintenance and buying new laptops or anything or servers. Other than that, we do not have large CapEx. And a couple of real estate in terms of refurbishing some of the premises, et cetera. We do -- other than that, we do not have any CapEx for the year planned.

[Operator]

Ladies and gentlemen, we will take that as a last question. I would now like to hand the conference over to the management for closing comments. Over to you, sir.

[Ravi Jakhar, executive]

Yes. Thank you all for joining in, and I hope you were able to respond to your questions, providing clarity and insights as much as we could. I would encourage you to stay in touch with our Investor Relations team to reach out for your queries, feedback and suggestions. It is your suggestions and questions that help us continue to improve our investor communication. And wherever we see a sustained demand for a particular kind of information, we try to include that in our investor presentation for the benefit of all stakeholders. On that note, I wish you a continued great festive joys, and thank you very much for joining us today.

[Operator]

Thank you. On behalf of Dolat Capital, that concludes this conference. Thank you all for joining us. You may now disconnect your lines.